Activist Shareholders Trading on the Blockchain: Is the Prized Secrecy Compromised?

While a registered shareholder holds its shares directly with a company and can be contacted through its transfer agent, a beneficial shareholder does not have the shares registered in its name. Instead, a securities depository is the registered shareholder. There are two types of beneficial shareholders, a Non-Objecting Beneficial Owner (NOBO) and an Objecting Bene­ficial Owner (OBO). A NOBO has authorized a financial intermediary to disclose its identity and share position. An OBO has taken affirmative steps to object to such disclosure. Therefore, while a NOBO can be contacted directly, an OBO can only be contacted through the intermediary. Activist shareholders are generally OBOs until they are required to disclose their identity and share positions under securities regulations. We briefly explore the impact of blockchain technology on this secrecy, which is fundamental to the strategy of activist shareholders.

Increased Adoption of Blockchains for Securities Transactions

A blockchain is an alternative to classical financial ledgers by providing a new way to create, exchange, and track information pertaining to the ownership of financial assets. Transactions are automatically recorded publicly and in real time. Major stock exchanges and leading financial institutions are rapidly exploring and adopting the use of blockchains for securities issued by corporations in order to ensure more accurate, efficient, and economical recording of share ownership.

After two years of testing with a blockchain technology provider, the Australian Securities Exchange (ASX) announced in December 2017 that they be the world’s first securities exchange to use blockchain technology in corporate finance. However, unlike the public blockchain, the ASX would use a “permissioned” blockchain where participants are known, must obtain permission to have access, and must comply with continuous obligations enforced by regulators. Even more recently, in February 2018, the Canadian Securities Exchange (CSE) unveiled that they would be the first recognised exchange in Canada to introduce a fully developed blockchain platform for trading, clearing, and settling tokenised securities.

Digital Wallets and Identification

The blockchain ledger of share ownership often conceals the transacting parties’ identities because assets are held in anonymous “digital wallets” bearing complex serial codes. However, on the blockchain ledger, ascertaining the identity of a shareholder may often require little effort. For instance, if an officer of a corporation announces their intention to subscribe to a certain quantity of shares, this would immediately be recorded on the blockchain ledger, thereby inferentially divulging the officer’s ownership of the corresponding digital wallet.

If the distinction between OBOs and NOBOs persists in the new era of blockchain trading platforms, secrecy may not appear to be lost for activist shareholders. However, blockchain enables traders to exchange shares in a more rapid and cost-effective manner, resulting in immediacy of information and increased transparency. With significant advances in data mining and machine learning, the market could identify activist shareholders as the buyers of shares through pattern recognition, as well as de-anonymization and re-identification strategies offered by specialist research firms. This parallels current de-coding methods, such as analyzing patterns in the sequence, quantity, and timing of trades, used by market participants to infer the identity of the shareholder.

While fund managers and individual investors stand to benefit from this increased information, activist shareholders, who value and depend on secrecy when building hostile positions, are less likely to be as welcoming. Blockchains for securities transactions could compel activists, who would prefer to remain undisclosed, to adopt new strategies to maintain their secrecy, such as using many digital wallets, splitting large share acquisitions into smaller ones, or treating digital wallets as “disposable” or single-use.

The author would like to thank Shan Arora, articling student, for his assistance in preparing this legal update.

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Norton Rose Fulbright's Special Situations Team has played a leading role in Canada’s most high-profile shareholder activist and defence mandates, as well as complex reorganization transactions. The Special Situations Law blog is about sharing our insights with you. With videos discussing shareholder activism, links to relevant case law and legislation and incisive commentary about regulatory and legal developments, our blog includes a wealth of resources and perspectives on special situations law.